CHAPTER 2 Kinds and Characteristics of Restaurants and Their Owners LEARNING OBJECTIVES After reading and studying this chap- ter, you should be able to: . ■ List and describe the various kinds and characteristics of restaurants. ■ Compare and contrast chain, franchised, and independent restaurant operations. ■ Describe the advantages and disadvantages of chef- owned restaurants. ■ Identify several well-known celebrity chefs. ■ Define what a centralized home delivery restaurant is andwhatitoffers. Courtesy of Sysco Kinds and Characteristics of Restaurants ■ 25 Kinds and Characteristics of Restaurants Broadly speaking, restaurants can be segmented into a number of categories: ■ Chain or independent (indy) and franchise restaurants: McDonald’s, Union Square Cafe, or KFC ■ Quick service (QSR), sandwich: Burgers, chicken, and so on; convenience store; pasta; pizza ■ Fast casual: Panera Bread, Atlanta Bread Company, Au Bon Pain, and so on ■ Family: Bob Evans, Perkins, Friendly’s, Steak ’n Shake, Waffle House ■ Casual: Applebee’s, Hard Rock Cafe, Chili’s, T.G.I. Friday’s ■ Fine dining: Charlie Trotter’s, Morton’s The Steakhouse, Fleming’s, The Palm, Four Seasons ■ Other: Steakhouses, seafood, ethnic, dinner houses, celebrity, and so on Of course, some restaurants fall into more than one category. For example, an Italian restaurant could be casual and ethnic. Leading restaurant concepts in terms of sales have been tracked for years by the magazine Restaurants & Institutions. Their survey of the top 400 restaurants in sales is summarized in Figure 2.1.1 CHAIN OR INDEPENDENT The impression that a few huge quick-service chains completely dominate the restaurant business is misleading. Chain restaurants have some advantages and some disadvantages over independent restaurants. The advantages include: ■ Recognition in the marketplace ■ Greater advertising clout ■ Sophisticated systems development ■ Discounted purchasing Ranking Concept Sales 1 Burgers $102,132,100,000 2 Casual Dining $27,152,900,000 3 Sandwiches/Bakery-Cafe´ $25,053,200,000 4 Coffee/Tea/Donuts $19,835,600,000 5 Family Dining $14,797,200,000 6 Mexican: Limited service $10,512,100 7 Seafood: Full service $6,080,600,000 8 Mexican: Full service $1,706,200,000 FIGURE 2.1: Top 400 segment ratings 26 ■ Chapter 2 Kinds and Characteristics of Restaurants and Their Owners When franchising, various kinds of assistance are available, which is dis- cussed later in the chapter. Independent restaurants are relatively easy to open. All you need is a few thousand dollars, a knowledge of restaurant operations, and a strong desire to succeed. The advantage for independent restaurateurs is that they can “do their own thing” in terms of concept development, menus, decor, and so on. Unless our habits and taste change drastically, there is plenty of room for independent restaurants in certain locations. Restaurants come and go. Some independent restaurants will grow into small chains, and larger companies will buy out small chains. Once small chains display growth and popularity, they are likely to be bought out by a larger company or will be able to acquire financing for expansion. A temptation for the beginning restaurateur is to observe large restaurants in big cities and to believe that their success can be duplicated in secondary cities. Reading the restaurant reviews in New York City, Las Vegas, Los Ange- les, Chicago, Washington, D.C., or San Francisco may give the impression that unusual restaurants can be replicated in Des Moines, Kansas City, or Main Town, USA. Because of demographics, these high-style or ethnic restaurants will not click in small cities and towns. FRANCHISED RESTAURANTS Franchising is a possible option for those who lack extensive restaurant experience and yet want to open up a restaurant with fewer risks than starting up their own restaurant from scratch. Or, if you’re a go-getter, you can open up your own restaurant, then another, and begin franchising. Remember that franchisors (the company franchising the rights to you and others) want to be sure that you have what it takes to succeed. They will need to know if you: ■ Share the values, mission, and ways of doing business of the franchisor ■ Have been successful in any other business ■ Possess the motivation to succeed ■ Have enough money not only to purchase the rights but also to set up and operate the business ■ Have the ability to spend lots of time on your franchise ■ Will go for training from the bottom up and cover all areas of the restau- rant’s operation Franchising involves the least financial risk in that the restaurant format, including building design, menu, and marketing plans, already have been tested in the marketplace. Franchise restaurants are less likely to go belly-up than independent restau- rants. The reason is that the concept is proven and the operating procedures are established with all (or most) of the kinks worked out. Training is provided, and marketing and management support are available. The increased likelihood of success does not come cheap, however. There is a franchising fee, a royalty fee, advertising royalty, and requirements of substantial personal net worth. Kinds and Characteristics of Restaurants ■ 27 For those lacking substantial restaurant experience, franchising may be a way to get into the restaurant business—providing they are prepared to start at the bottom and take a crash training course. Restaurant franchisees are entrepreneurs who prefer to own, operate, develop, and extend an existing business concept through a form of contractual business arrangement called franchising.2 Several franchisees have ended up with multiple stores and made the big time. Naturally, most aspiring restaurateurs want to do their own thing—they have a concept in mind and can’t wait to go for it. Here are samples of the costs involved in franchising: ■ A Miami Subs traditional restaurant for a single unit has a $30,000 fee, a royalty of 6 percent of monthly gross sales, a payment of 3 percent of monthly gross sales to the advertising fund, and a net worth of at least $350,000 with $150,000 of this minimum net worth in liquid assets.3 ■ Chili’s requires a monthly fee based on the restaurant’s sales performance (currently a service fee of 4 percent of monthly sales) plus the greater of (a) monthly base rent or (b) percentage rent that is at least 8.5 percent of monthly sales.4 ■ McDonald’s requires $300,000 in cash or liquid assets, a $45,000 initial fee, plus a monthly service fee based on the restaurant’s sales performance (about 4 percent) and rent, which is a monthly base rent or a percentage of monthly sales. Equipment and preopening costs range from $905,200 to $1,746,000.5 100th anniversary photo, Columbia Restaurant, Tampa, Florida Courtesy of Columbia Restaurant 28 ■ Chapter 2 Kinds and Characteristics of Restaurants and Their Owners ■ Pizza Factory Express units (200 to 999 square feet) require a $7,500 franchise fee, a royalty of 5 percent, and an advertising fee of 2 percent. Equipment costs range from $25,000 to $90,000, with miscellaneous costs of $3,200 to $3,900 and opening inventory of $6,000.6 ■ Earl of Sandwich has options for one unit with a net worth requirement of $750,000 and liquidity of $300,000; for five units, a net worth of $1 million and liquidity of $500,000 is required; for 10 units, net worth of $2 million and liquidity of $800,000. The franchise fee is $25,000 per location, and the royalty is 6 percent.7 What do you get for all this money? Franchisors will provide: ■ Help with site selection and a review of any proposed sites ■ Assistance with the design and building preparation ■ Help with preparation for opening ■ Training of managers and staff ■ Planning and implementation of preopening marketing strategies ■ Unit visits and ongoing operating advice There are hundreds of restaurant franchise concepts, and they are not without risks. The restaurant owned or leased by a franchisee may fail even though it is part of a well-known chain that is highly successful. Franchisers also fail. A case in point is the highly touted Boston Market, which was based in Golden, Colorado. In 1993, when the company’s stock was first offered to the public at $20 per share, it was eagerly bought, increasing the price to a high of $50 a share. In 1999, after the company declared bankruptcy, the share price sank to 75 cents. The contents of many of its stores were auctioned off at a fraction of their actual cost. At one point in time McDonald’s purchased Boston Market, only to sell it months later to Sun Capital Partners.8 Fortunes were made and lost. One group that did not lose was the investment bankers who put together and sold the stock offering and received a sizable fee for services. The offering group also did well; they were able to sell their shares while the stocks were high. Quick-service food chains as well-known as Hardee’s and Carl’s Jr. have also gone through periods of red ink. Both companies, now under one owner called CKE, experienced periods as long as four years when real earnings, as a company, were negative.9 the company is surviving despite the bad economy. “Despite a tough economy, Carl’s Jr. is setting sales records in new markets, continuing to grow its unit count and giving customers what they want—premium quality burgers at fair prices,” said Andy Puzder, chief executive officer of CKE Restaurants, Inc., parent company of Carl’s Jr. and Hardee’s chains. “Posting back-to-back sales records in less than two months is remarkable. Wall Street seems to need a few success stories to shake it out of the doldrums, and we’re thrilled to be able to provide some.”10 However, there is no assurance that a franchised chain will prosper.